How to Assume a Conventional Mortgage
Navigate the nuanced process of assuming a conventional mortgage. Understand the detailed steps from initial inquiry to final transfer.
A mortgage assumption allows a homebuyer to take over an existing mortgage from a seller, inheriting the loan’s current interest rate, remaining principal balance, and repayment terms. While this process is more commonly associated with government-backed loans like FHA, VA, and USDA mortgages, assuming a conventional mortgage is considerably less common. The standard practices within the mortgage industry often make conventional loan assumptions rare.
Identifying an Assumable Conventional Mortgage
Determining if a conventional mortgage can be assumed depends on a “due-on-sale” clause in the original loan documents. This standard clause gives the lender the right to demand full repayment when the property is sold. If present, which is typical for conventional loans, the mortgage is generally not assumable.
To verify assumability, review original loan documents like the promissory note and deed of trust. If the contract is silent, the loan might be assumable. Contacting the current mortgage servicer is an important step to inquire about the loan’s status and policies. Lender approval is a requirement even if documents do not explicitly prohibit assumption.
Preparing for Mortgage Assumption
Before applying, prospective and current borrowers must gather information. Lenders assess buyer financial qualifications similar to a new mortgage. This includes a satisfactory credit score of at least 620, income stability, and a debt-to-income (DTI) ratio expected to be under 43% to 50%.
Buyers provide documentation including recent pay stubs, W-2 forms from the past two years, and federal tax returns. Bank statements are required to verify assets and cash reserves. Buyers should review the existing loan’s terms, including the current interest rate, remaining principal balance, and escrow account details for property taxes and insurance. The buyer will inherit these terms.
For the seller, preparation involves providing loan account information to the buyer and lender, including loan balance, payment history, and interest rate. The seller should seek a formal release of liability from the lender. Without this release, the seller remains financially responsible for the loan, even after property transfer. The release absolves the seller from future financial obligations.
Submitting the Assumption Application
Once preparatory steps are complete, the formal application can begin. The process starts by contacting the lender’s assumption department to request forms and understand requirements. These forms require the detailed financial and personal information gathered during preparation. The completed application package can be submitted through methods specified by the lender, such as mailing or uploading via a secure online portal.
Application or processing fees are non-refundable. These fees range from 0.5% to 1% of the outstanding loan balance, or they might be a flat fee, such as $1,000. For government-backed loans, these fees are capped, for example, FHA fees are capped at $1,800.
After submission, the lender initiates an underwriting review to assess the buyer’s qualifications. This involves verifying income, credit history, and debt-to-income ratios to ensure the buyer can responsibly assume the loan. The underwriting process can take 45 to 90 days.
Completing the Assumption Process
Upon successful review, the lender provides an approval notification. An important step is signing new legal documents, primarily an assumption agreement. This agreement formally transfers the mortgage obligation to the new buyer. If approved by the lender, the original borrower receives a formal release of liability, absolving them of future financial responsibility.
The closing procedures are similar to a traditional home sale but involve fewer costs. These procedures include prorations for property taxes and insurance, divided proportionally between the buyer and seller based on the closing date. Escrow account adjustments are also handled. The property title must be correctly transferred and recorded in the new owner’s name with local government authorities. Once all documents are signed and recorded, the transfer of mortgage obligation and property ownership is complete.